Cliffs delays Bloom Lake expansion, cuts 2013 iron ore output

Cliffs Natural Resources (CLF-N) is applying the brakes on its iron ore operations in North America as fundamentals for the metal weakens, citing unstable prices and a drop in North American steelmaking.

The international miner announced on Nov. 19 a year delay for its second phase expansion at the Bloom Lake mine in Quebec while curtailing production at two of its iron ore operations in the U.S. due to lower expected sales volumes in 2013.

At Bloom Lake, Cliffs has suspended work at the concentrator and load out facility, dismissing 450 contractors as reported by the Canadian Press. But 305 employees will continue with pre-stripping the orebody and carrying out environmental work for the water and tailings management system and storage facility.

Assuming market conditions pick up, Cliffs aims to finish the second phase construction at the mine in early 2014, instead of 2013.

As a result of the delay, the Cleveland-based firm has lowered its Eastern Canadian iron ore sales volumes for 2013 to nine to 10 million tons, down from 13 million to 14 million tons previously.

In the U.S., Cliffs will close two of its four production lines at the Northshore Mining in Minnesota on Jan. 5, 2013, putting 125 jobs on the line. It will also curb output at its Empire mine in Michigan in the second quarter of the year, impacting 500 workers.

Despite the upcoming changes, Cliffs forecasts its full-year 2013 U.S. iron ore sales volumes to remain at 19 million to 20 million tons.

It estimates preliminary capital expenditures for 2013 of US$700-$800 million and is set to report its full-year company-wide expectations when it releases its fourth-quarter 2012 results.

Given the project delays and closures, BMO Research has trimmed its 2012 earnings estimate to US$3.34 from US$3.35 and 2013 forecast of US$3.50 a share to US$3.23, writes BMO’s London-based analyst Tony Robson in a note.

He adds the current US62.5¢ a quarter or US$2.50 per year dividend should be reduced in 2013 as it appears hard to maintain with the projected tight near-term cash flow.

“At a reasonable iron ore price, says US$120 per ton and above (basis 62% China CFR) there is enough cash flow to cover the dividend payment. However, the current dividend amounts to a payout ratio approaching 100%, and even a lower dividend may exceed net profit for H1/13 depending on market conditions.”

Robson has lowered the dividend estimate for 2013 and onwards to US$1.12 a year or US28¢ a quarter.

“This reduces the projected payout ratio to 35% on 2013 projected earnings, and lowers the cash outflow on dividends from US$356 million to a more manageable US$160 million.”

Adding to the cash flow pressure next year is Cliff’s US$270-million debt repayment due in June, says Robson, pointing out the company “remains a higher risk iron ore play due to its moderate-to-high cost operations and its leverage to iron ore prices.”

Market analyst Roskill Information Services expect prices to stay north of US$120 per ton CFR for Indian fines of 63.5% iron content until the end of 2014, but cautions a restocking phase may push prices to US$135 per ton in 2013.

It further warns if new capacity comes online the prices could drop, possibly to US$100 per ton towards 2015.

A day after the delay was announced Cliffs lost 12% to close Nov. 20 at US$30.40. It has since recovered slightly to end Nov. 23 at US$31.23 per share.